Public Bill Committee

[Mr David Amess in the Chair]

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules)

Written evidence to be reported to the House
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David Amess: The room is relatively warm, so Members may, within reason, remove articles of clothing to be comfortable throughout our proceedings.

Clause 6  - Main rate for financial year 2015

Question proposed, That the clause stand part of the Bill.

Christopher Leslie: Good morning, Mr Amess. It is a pleasure to serve under your chairmanship. I cannot think of anywhere I would rather be than here on the Finance Public Bill Committee.
All hon. Members are ready and raring to go, although I am not sure we should remove all items of clothing for comfort. I am sure we gentlemen should continue to wear our neck ties. You would not want the Committee to go all Conservative modernist, Mr Amess. I wonder whether you remember the good old days, when the Conservatives were in the centre ground. The hon. Member for Grantham and Stamford (Nick Boles) was the main exponent of the open-neck look. How long ago those days seem now that the Conservatives have firmly moved back to the right of the political spectrum. Anyway, I digress. [Interruption.] Well, one has to have a go at such things.
The clause takes us back a little to before the Committee adjourned, when we were debating the clauses relating to corporation tax changes. The Exchequer Secretary is not with us today, but he led that debate opposite my hon. Friend the Member for Kilmarnock and Loudoun last time the Committee sat. I will ask the Economic Secretary a few questions to test his knowledge of the Treasury’s corporation tax strategy. I am not sure who is in charge of such things, but I am sure he has a strong grasp of the matter.
We hope that reducing corporation tax will have an economic benefit. After all, the previous Labour Administration reduced corporation tax and there is clearly a good case to be made for some of that strategy. However, we now feel very strongly that we require evidence for the Government’s continuing changes, particularly relating to 2015, which is the subject of the clause. The clause will put corporation tax at 20% of company profits, other than ring-fenced profits, which are, of course, addressed elsewhere in the Bill.
Obviously, there is some sort of relationship with levels of personal taxation and income tax. After all, it is sometimes said that corporation tax could almost be regarded as deferred income tax, because corporations are ultimately owned by individual shareholders, who, at some level, pay tax on any income that comes downstream from corporate profits. The Economic Secretary may wish to elaborate on the argument that there is a point of alignment here with the 20% rate. Has a strategic choice been made on rates of income tax? Last time we sat, the Committee debated alignments with the small profits rates of smaller firms, but did income tax go through the Treasury’s mind when it was thinking about these points?
I do not think that the Treasury has ever produced a firm analysis of how further cuts to corporation tax would definitely feed through into economic growth. There has been all sorts of conjecture, speculation and anecdotal examples from various hon. Members, but we need to see hard evidence to be certain that such instincts are correct. I want to press the Minister on whether further falls in corporation tax will undoubtedly feed through into positive economic activity or whether, as some suspect, corporate surpluses will be stockpiled if the tax strategy is not correct?
I want to ask the Minister about his understanding of inward investment and outflows of investment from the UK relative to other jurisdictions. The corporation tax rates set for 2015 will not exist in isolation; other national jurisdictions set their own. Labour tax practitioners are anxious that if we are not careful, the UK will get into a vicious circle of a constant chase for lower rates, in which countries engage in an arbitrage process of always outbidding one other, with the result that public services and public investment lose out.
It may well be that the United Kingdom finds itself in a more tax competitive position than other jurisdictions, but that is not necessarily guaranteed because they are perfectly able to reciprocate by following suit or even outbidding the United Kingdom, as we have seen in some jurisdictions over the past decade or two. Any observer of international tax rates would say that those rates have tended to flow downwards across the main developed jurisdictions. Has the Minister taken stock of where that flow will end? Will the main developed nations settle on an equilibrium as a natural level of corporation tax, or will that circle be pursued in perpetuity, which would obviously affect the Treasury’s strategy?
Famously, the Republic of Ireland has a corporation tax level that is relatively low compared with those of other countries. It has been under pressure, particularly from Germany and other member states of the European Union, under the rescue programme for countries in the eurozone that require financial assistance. There was speculation about Germany or other nations putting pressure on Ireland to move its corporation tax strategy in an alternative direction. It is obviously unusual for a nation state that has a particular tax strategy to come under external pressure from its partners and other nations.
Thankfully, we stayed out of the euro, as a result of decisions taken by Labour—[Laughter.] We will see where the Chief Secretary to the Treasury—the Minister’s good colleague—takes the Treasury, because he spent 10 years of his life campaigning for membership of the euro, but I do not want to digress again. We need to know what evidence the Treasury has that the strategy for a cut in corporation tax in 2015 will yield positive economic benefits, rather than essentially being lost by our fuelling an international race to lower levels.
I have seen the recent statistics on inward foreign direct investment, but there is a lag in relation to when they are collected. While this Government have been in power and perhaps pursuing this particular strategy, our inward foreign investment levels have fallen back somewhat compared with previous levels. Indeed, as far as I can see, the amount of British money that has been invested in foreign jurisdictions has increased. The figures show that in 2011 foreign companies invested £31.9 billion in the UK, which was a fall compared with the 2010 figures and the lowest investment level since 2004.
Perhaps the Minister can give us the most recent statistics that the Treasury has about FDI. He could make a case for his corporation tax strategy if he said that inward investment into the UK had been somehow connected with the levels of corporation tax that the Government had been pursuing. However, as far as I can see from this set of statistics that the House of Commons Library has produced, in 2011 outward FDI by UK companies was £68 billion, an increase of £42 billion from 2010, which is a phenomenal increase in the amount of money leaving the UK and going elsewhere. One could make an assumption—there might be a simple correlation rather than a causal effect—that British companies were choosing to invest net higher levels outside our own jurisdiction, for whatever reason. Perhaps corporation tax is part of that equation, but we need to get a view from the Minister about what is happening with those particular choices.
Our preference would be that British money and British companies choose to invest in the future prosperity of British firms and British endeavours, supporting UK enterprise and increasing job creation in this country. I know that Government Members have a terrible blind spot when it comes to jobs, economic growth and these particular questions.
 Kwasi Kwarteng (Spelthorne) (Con)  British jobs for British workers.

Christopher Leslie: That is an interesting intervention from the hon. Gentleman. Perhaps he wants to tell us if that is now his policy. If it is his policy, I am not sure that the strategy is borne out by the evidence before us.
Nevertheless, the Minister should tell us a little more about this issue. If he does not have the figures on inward flows of investment and outflows from the UK, I would be more than happy for him to write to the Committee to give us any more information. That would be extremely helpful.
I also want to take the opportunity to ask the Minister to clarify what will happen on corporation tax in 2015 in relation to the banking sector. We touched on some of these issues a little in the debate on clause 4, but we did not get to the bottom of the issue of the other tax that interplays with corporation tax. As part of the Government’s strategy, they have introduced a levy on the banks, at a puny, knock-down rate. They said that it was supposed to yield £2.5 billion annually, but it has totally failed to bring in the sums that the Prime Minister promised that it would. In fact, last year it brought in only £1.6 billion, which represents a pretty big shortfall. Think what that extra £900 million could have done for public services and investment if they had hit that £2.5 billion target. The year before, I think that only £1.8 billion was brought in.
The Government said that they were going to offset the corporation tax cuts for the banks with an adjustment in the bank levy. It does not appear, at first glance, that that is what has happened in the last couple of financial years. I want to press the Minister to give us a bit more detail about how exactly this particular change for 2015, as set out in clause 6, will work. What is the formula that feeds back through into the bank levy in terms of the way that that has been calculated? Obviously, if there is going to be a 20% rate in 2015, adjustments to the bank levy will need to be made, but I do not see directly in the Bill where that offset is being made. I want to see a straight line—maybe even a dotted line—from one bit of clause 6 to those other provisions, so we can be certain that that nice, juicy corporation tax cut, which I am sure the banks are all rubbing their hands at and looking forward to, will be clawed back through the bank levy increases planned elsewhere.
If our constituents knew that the Minister and the Chancellor of the Exchequer were giving a corporation tax cut not just to many large multinational corporations but particularly to the banking sector, I think they would be very concerned. They are not getting a tax cut this year. Our constituents are being clobbered by the reductions in tax credits and the increase in VAT. [Interruption.] We should be thinking about the VAT increase as a petrol tax, as my hon. Friend the Member for Cardiff South and Penarth suggests.
What is the formula? How does it feed into the bank levy? I am assuming that if the economy improves by 2015—although heaven knows—we might have some bank profitability by that time. Perhaps the Minister can give us a sense of what it would be. If we have bank profitability by 2015, presumably there will be corporation tax on those profits. Ultimately, the problem with corporation tax is that if businesses are not doing very well or are making losses, that yields no corporation tax. Again, it would be helpful for the Committee if the Minister could give us a projection of what he anticipates the corporation tax yield will be in 2015. Perhaps that will give us a sense of the Government’s confidence in business profitability by the time of the next general election; the rate will kick in about four weeks before that, during the campaign. What is the Treasury’s projection of yield from corporation tax as a result of the change?
I know that Government Members often like to refer to what is sometimes known as the Laffer curve, their slightly antediluvian theory, used with the 50p rate in tax, that tax can be reduced to low levels and somehow miraculously yield massive revenues as a result. They do not call it Laffer for nothing; there is a reason why it has that particular nomenclature. Speaking of Laffer, I give way to the hon. Member for Braintree.

Brooks Newmark: I am a protégé and acolyte of Professor Laffer. Does the hon. Gentleman not agree that one must look at the evidence? The evidence indicates that when the Thatcher Government reduced the punicious—sorry, punitive, and pernicious—tax rates of the Labour Government of the late 1970s, taxation on unearned income was cut from 98% and other taxation was cut from 60% to 40%. As the tax rates were reduced, the Exchequer’s tax take increased. As an economist and somebody involved with the Treasury, he should recognise that what is important is not political point-scoring but ensuring that we raise the maximum amount of revenues possible from taxation.

Christopher Leslie: My hon. Friend the Member for Kilmarnock and Loudoun made this point in previous debates. Obviously, if the tax rate is set at 100%, it will have a pretty devastating effect on the revenue yield, but if the rate is 0%, obviously, there will be no revenue, hence the issue of what happens in the mid-ranges in between.
What Professor Laffer did not factor into his analysis was forestalling people’s behavioural change when it comes to particular rates of tax. We have seen clear evidence that behaviour has been distorted by the knowledge that the 50p rate would be reduced to 45p. Many wealthy individuals, or high net worth individuals as they are sometimes called, held back until that 50p rate fell to 45p and decided to give themselves a big bonanza pay packet on the flipside of that tax year. If only the Government had given the 50p rate a proper run, we would have seen a significant benefit for taxpayers, but they were far too generous to the millionaires of this country.

Brooks Newmark: I sense the hon. Gentleman’s strong feeling for wanting the 50p rate and ensuring that it is raised back up from 45p to 50p. Does he regret that during their 13 years in office the last Government did not raise the higher level of taxation to 50p until their last six weeks?

Christopher Leslie: I am glad that the last Government put the rate at 50p, which was fair and popular. Our constituents, including those of the hon. Gentleman, agreed with that move. I take it from his representation that he wanted a 50p rate far earlier and that he thought it should have been introduced the previous year, or the year before that. I am fascinated that Conservative Members were itching for that 50p rate so much sooner than when it was introduced.

Sheila Gilmore: Enthusiasm for the 50p rate is sometimes overwhelming in this debate. Regardless of that, the context in which the decision was made on the 50p tax rate was very much part of a deficit reduction programme, and many of my constituents believe that if we are to have deficit reduction, everyone must play their part in that. The context was substantial cuts in various forms of social security benefits, tax credits and so on, and it was reasonable in that context to raise the tax to 50p.

Christopher Leslie: Coming back to clause 6 and the corporation tax rates, our constituents want to know that the Treasury is being fair in its approach to taxation across a whole set of different classes of taxpayer in different circumstances. Many of our constituents may think that we should support business and ensure that that we get the tax rate right, but they are paying far more than in 2010—the extra cost of tax increases and cuts in various benefits is £891 for a typical family compared with 2010—and when they see the Government’s strategy of cutting taxes for millionaires and making generous provision for banks and so on, they want to know sort of priorities the Government have. That is why, with corporation strategies such as this, we need to see evidence that they are yielding results. So far, the economic performance of the last three years has not in any way verified that the Government’s tax strategy is yielding economic benefits.
That is the point I want to put to the Minister today. I want him to answer questions about the bank levy and to know how he is calculating that formula to make that offset. I want to see the evidence of foreign direct investment, and above all I need to hear from the Minister what evidence he has that this corporation tax strategy will be beneficial for the economy. Is it ideology or a theory? What evidence does he have? Those are the points I wanted to make about the clause.

Sajid Javid: May I say, Mr Amess, that it is a pleasure, as always, to serve under your chairmanship? I look forward to taking part in the Committee. I will come to some of the specific questions asked by the hon. Member for Nottingham East in a moment. First, I will introduce clause 6, which sets out the main corporation tax rate and the charge for the financial year beginning on 1 April 2015. The rate will be reduced to 20%, as announced in Budget 2013. It will be the joint lowest rate in the G20—lower than almost all our key competitors, including the Netherlands, France, Germany, the United States and Japan. Among those last two countries, key competitors of Britain in the global race, the US has a corporation tax rate of 40% while Japan has a rate of 38%.
We have just heard the hon. Gentleman’s views regarding the cut, and there has been an interesting discussion on why the Government are reducing corporation tax rates and the impact on businesses and investment across the country. A stable tax system is vital for business. Legislating now for the rate reduction in 2015 will provide the certainty that is needed for effective business planning. Next year’s Finance Bill will legislate to unify the small profits rate, which is already 20%, with the main rate from April 2015, so that there is a single headline rate of corporation tax—a significant simplification of the tax system.
I was asked what evidence there is of the benefits of this Government’s strategy of making Britain more competitive and more open for business. The announcements made by global multinationals including some of the largest companies in the world, and their reactions to the Government’s policy, including the policy to reduce corporation tax rates and make Britain’s tax rates more competitive, show how confidence in Britain is being boosted and how our policy is generating jobs and investment. WPP, the world’s largest advertising agency, has announced that it will move its headquarters back to Britain. Other companies, such as Aon, Seadrill, Ensco, Lancashire and Rowan, have announced that they will move their global headquarters to Britain, generating jobs and investment. That is firm evidence that the Government’s changes are already making a difference.
The hon. Gentleman asked about foreign direct investment. The most recent annual report on FDI published by Ernst and Young states that the UK is the highest recipient of FDI in Europe. One reason it cited was the changes that the Government are making in cutting tax rates and making Britain more competitive.

Christopher Leslie: The Minister is good on statistics, which his Department provides him with a great number of. However, I was looking not for a snapshot volume of foreign direct investment but for the direction of flow, which we have seen reducing. Of course, the UK, being a large economy, will have a large amount of FDI, but what is happening with it? The 2011 figures were disappointing. What has been happening more recently? I genuinely do not know the answer to that.
The Minister says, anecdotally, that there is this company coming and that company over here. It is not methodologically rigorous of him to pick one or two companies as an example of the success of a whole policy. We need to get the whole picture. Companies will come, but other companies will leave. What is the flow? I want a better statistic from the Minister.

Sajid Javid: The latest numbers on FDI published by the Office for National Statistics—for the quarter ending 2012—showed that direct investment abroad by UK companies, which the hon. Gentleman also talked about, had fallen by £12 billion to £3.2 billion. I think he suggested that the figure was going up, but the ONS figures show something to the contrary. Direct investment into the UK increased by £0.3 billion to £7.2 billion. Clearly the number is heading in the right direction, which I am sure is a direct result of this Government’s policy to promote Britain and create more jobs and investment.

Stephen Doughty: What direction does the Minister think those figures would go in if we were to leave the European Union?

Sajid Javid: That is not the subject of the debate.

Christopher Leslie: He was tweeting about it.

Sajid Javid: It is not the subject of this debate, and I do not think my tweets are the subject of this debate. It is important that we have a debate on Europe, but this is not the time or place for it.

Brooks Newmark: My hon. Friend was correct to point out the extremely high corporate tax rates of the United States and of Japan. While we are in Europe—as we still are—the competitive landscape within the European Union has to look attractive for the UK. It is worth noting that the corporate tax rate in Belgium is 34%, in France, it is 33%, in Italy, it is 32% and in Germany it is almost 30%. In that competitive landscape, is it not best to attract businesses within Europe to come to, settle in and have their headquarters in the UK, so that UK plc benefits from those tax revenues?

Sajid Javid: As always, my hon. Friend is absolutely right. He understands business, as Government Members do; that is why we are taking these measures. It is no surprise to me that Opposition Members find it hard to understand how to attract business and investment to Britain.
It might help to quote other people who have direct experience of the business world. The director-general of the CBI said:
“An extra one penny cut in corporation tax will...make the UK one of the most internationally competitive locations in which to do business.”
The director-general of the British Chambers of Commerce said:
“All companies will cheer the news that Corporation Tax will fall to 20% by 2015. This is an important fillip to business confidence, particularly among global investors.”
Those people know a lot more than the hon. Member for Nottingham East about how to attract business into Britain.
The hon. Gentleman also raised the issue of the bank levy. As he points out, the Government have rightly increased the bank levy alongside each cut in corporation tax to ensure that banks do not benefit from the decrease in the corporation tax rate. In the last autumn statement, we increased the bank levy to 0.13%, effective from January 2013. In Budget 2013 we announced that the rate would increase further, to 0.142%, from 1 January 2014. It is right to take those measures and ensure that banks are making their contribution to the fiscal consolidation process.

Christopher Leslie: What will be the commensurate increase in 2015-16? As I understand it, the clause relates to corporation tax rates from the financial year 2015-16. The Minister said that he would offset that for the banks with a change in the bank levy, but he has not said what the bank levy rate will be in 2015-16.

Sajid Javid: The hon. Gentleman raises a good point. We will set that out in due course. We have said quite clearly that any reductions in the corporation tax rate will not be passed on to banks, and that will be achieved by increasing the bank levy rate.

Christopher Leslie: Let me get this absolutely clear. The Minister and the Government are telling the banks that they will get a corporation tax cut from April 2015, to 20p, but the Minister is not prepared to say at this stage what the increase in the bank levy will be in 2015-16. Have I got that factually correct?

Sajid Javid: The Government have made clear how we intend to cut the corporation tax rate, and in Budget 2013 we set out our plans to increase the bank levy rate. We will announce any further changes in due course. The purpose of this debate is not for me to announce tax changes that will be made clear in future Budgets.

Christopher Leslie: I am surprised at that, because there was a clear commitment by the Chancellor of the Exchequer—for it was no less than that right hon. Gentleman—that the banks would have their corporation tax cut recouped by a commensurate increase in the bank levy. The Minister is clearly not prepared to tell us what the bank levy will be for 2015-16. Will he at the very least guarantee to the Committee, with a cast-iron guarantee, to quote the Prime Minister—

Stephen Doughty: Copper-bottomed.

Christopher Leslie: Copper-bottomed, as well as cast-iron. Will the Minister guarantee to the Committee that the bank levy will increase in 2015-16?

Sajid Javid: We have always made it clear that any cuts in corporation tax will not be passed on as a benefit to banks, which we ensure by increasing the bank levy. That is absolutely the case for the cut in corporation tax that will take effect in 2015-16, as there will be a further increase in the bank levy. To set the levy, we look at the most up-to-date forecast of corporation tax to ensure that it is set based on the best information available.
I would like to point out that the hon. Gentleman and his colleagues have, on a number of occasions, made the case for replacing the bank levy with a repeat of the bankers’ bonus tax, which, incidentally, would have raised less money than the levy in each year that the levy has been in effect. It is intriguing that he set out that the revenue that he thinks a bankers’ bonus tax will raise £1.6 billion when last year’s bonus pool was £1.8 billion—[Interruption.]. I will give way to him if he wants to confirm that his intention would be to have a 90% tax rate, or thereabouts, on bankers’ bonuses.

Christopher Leslie: I dispute the Minister’s statistics, which are dodgy in the extreme. He needs to take a look at that. What statistic is he using for bankers’ bonus payments for 2012-13? Is he really certain that those bonuses were £1.8 billion? I understood that Her Majesty’s Revenue and Customs’ figures were quite different? Will he put that on the record?

Sajid Javid: A moment ago, the hon. Gentleman was commending my use of statistics, but now, when it does not suit him, he does not like it. The latest numbers from the banks are that approximately £1.8 billion was paid in bonuses in the latest year. If he believes that he can raise £1.6 billion from £1.8 billion, he must be suggesting a tax rate similar to that imposed by Labour in the late 1970s.

Christopher Leslie: What is the Minister’s source for that figure for 2012-13?

Sajid Javid: I will be more than happy to provide the hon. Gentleman with my source.

Christopher Leslie: Tell us now.

Sajid Javid: I will write to the hon. Gentleman and provide him with that source. If he is not comfortable with the source, he is at liberty to raise that with me. I notice he has not answered my question about how, on a £1.8 billion base of income, he thinks that we can raise £1.6 billion. His bankers’ bonus policy has just fallen apart.

Nigel Mills: When my hon. Friend writes to the hon. Member for Nottingham East with the details on how much the bankers’ bonuses were worth, will he include how much tax was paid on those bonuses in personal income tax, national insurance and employer’s national insurance?

Sajid Javid: My hon. Friend raises a good point; it would be useful to include that information and I will seek to do so.
The hon. Member for Nottingham East raised questions on what I think he loosely described as tax fairness and he talked about the impact of tax changes. I know, Mr Amess, that this debate is about corporation tax, but I hope that you will allow me briefly to point out the tax cuts that the Government are making.
Through the personal allowance, there is a cut for 24 million people. When that allowance hits £10,000, more than 3 million people will be taken out of taxation altogether. All the individuals who enjoyed Labour’s 10p tax rate, which they then abolished, will now be paying a zero rate of income tax.
As for taxation on the highest earners, we made changes designed to ensure that the wealthiest make the biggest contribution to fiscal consolidation. The increase in the capital gains tax rate from 18% to 28% is fair not only because it makes the richer in society contribute more. It also ensures, as my right hon. Friend the Chancellor of the Exchequer said in yesterday’s debate, that we have got rid of a situation in which the cleaners in hedge fund offices were paying higher tax rates than the hedge fund managers themselves.
In conclusion, reducing the main corporation tax rate to 20% in 2015-16 will further reduce the cost of new investment, incentivise activity across the economy and provide further support for the Government’s ambition to achieve the most competitive tax system in the G20.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7  - Temporary increase in annual investment allowance

Catherine McKinnell: I beg to move amendment 10, in clause 7, page 3, line 8, at end add—
‘(3) The Treasury shall review, within six months of Royal Assent, the impact that changing the allowance under section 51A of CAA 2001 from £100,000 to £25,000 and back to £250,000 has had on small and medium-sized enterprises and business confidence, and a place a copy of this review in the Library of the House of Commons.’.

David Amess: With this it will be convenient to discuss the following:
Clause stand part.
That schedule 1 be the First schedule to the Bill.

Catherine McKinnell: It is a pleasure to be back in Committee under your chairmanship, Mr Amess. Clause 7 and the incredibly complex schedule 1 increase the annual investment allowance for businesses to £250,000 for a temporary period of two years, as announced in the 2012 autumn statement. Rather oddly, given that the measure will be enacted in this Finance Bill, the provisions of clause 7 took effect on 1 January 2013, as opposed to from the start of the tax year or the accounting period for most companies. I will return to the significance of that point.
Although welcomed by many, the announcement of the increase in Labour’s annual investment allowance came not long after the Government’s earlier decision by to reduce it significantly. Chopping and changing in this way risks further destabilising business confidence to invest.
We are keen to see a proper review of the size and numbers of businesses that benefit from the measure, given the somewhat conflicting information that has been provided by the Chancellor about those benefiting from the annual investment allowance in recent years. That is why amendment 10 calls on Her Majesty’s Treasury to undertake a review of the impact of the increase in the AIA on small and medium-sized enterprises. It should take into consideration the impact of the previous reduction and the subsequent increase, which, according to the explanatory notes to the Bill, has been introduced with a view to
“providing an additional, time-limited incentive for businesses (particularly small and medium-sized businesses) to increase, or bring forward, their capital expenditure on plant or machinery.”
The amendment is intended to enable us to ask the Government seriously to review and consider the impact of the continual and, many have said, somewhat erratic changes in the annual investment allowance and what impact that may have had on business confidence.

Brooks Newmark: I am not sure what the hon. Lady’s direction of travel is. I understand her first point: she does not like the chopping and changing. No businesses like that at all, but is she saying that there should be a review, or that there should have been a review before the increase in the allowance was implemented, or is she saying that after a year we should stop and there should be a review?
The hon. Lady talks of small and medium-sized businesses, as I do and other hon. Members on both sides of the Committee do. She will know that £25,000 is a small amount when one is deciding whether to make an investment, but £250,000 allows companies to invest in a reasonable amount of capital expenditure. The issue today is that we need to get this money on the ground and working as fast as possible, not wait another three months, 12 months or 24 months.

Catherine McKinnell: I thank the hon. Gentleman for that intervention. If he reads the amendment, he will see that it clearly says a review will be undertaken
“within six months of Royal Assent”
being given to the Bill. It would be a review, in the future, of the impact of chopping and changing. Labour introduced the £100,000 level for annual investment, recognising its value in stimulating the business investment that the hon. Gentleman agrees the allowance can bring. The review would look at the impact of slashing that to £25,000, which had a limited impact on encouraging businesses to invest, as the hon. Gentleman eloquently said—he rather made my point for me, and I thank him for that. The intention is that the review would take proper stock of the impact of chopping and changing the policy by reducing the level from £100,000 to £25,000 and then increasing it to £250,000.

Sheila Gilmore: The case was indeed made for my hon. Friend on the allowance. At the time of the 2010 emergency Budget, the Chancellor told us that it would not really be a problem to make the reduction, because 95% of businesses invested less than £25,000 anyway and that was why he was making the cut. Clearly, three years ago, the Chancellor was not convinced of the measure in the Bill. If he had been, the economy might be in a better state now.

Catherine McKinnell: My hon. Friend makes an important point, which I will go into in more detail. There has been some confusion, and the Chancellor, in particular, has certainly put some conflicting information out there about the impact of this measure on boosting investment, particularly in areas of the economy that the Government have expressed a commitment to rebalancing.

Paul Uppal: I might be able to provide some guidance to the hon. Lady. I recently looked at some research from a team at Lombard, a subsidiary of RBS, which has noted that there has already been a 15% year-on-year increase in investment, spurred by the likes of the automotive supply chain, in which production in the UK has hit a four-year high and car exports have registered a record high. Ultimately, growth is about confidence. One problem with the amendment is that the Opposition are talking down positive news. We really have to talk up investment, and that is about confidence. The amendment is counter-productive from that perspective.

Catherine McKinnell: I thank the hon. Gentleman for his comments. I think he knows that the performance of manufacturing has not been as strong as it should and could be. We have still not seen the march of the makers leading us into a new generation of manufacturing in this country. He talks about confidence, but that is not reflected in the message I am getting from businesses—certainly those in my region, but also those I speak to around the country. That confidence is what the Opposition are interested in safeguarding and projecting in the future.
The amendment is in no way intended to undermine confidence or talk down business. It is intended to do completely the opposite—to focus on the impact that chopping and changing business policy has on business confidence and to take stock for the future of how the undermining of business confidence can be prevented. Many business sources have confirmed my fears that this chopping and changing undermines confidence. As the hon. Gentleman knows, and as the hon. Member for Braintree said, uncertainty about the future and about Government policy is one of the most destabilising forces for business and business investment. That is the point we are looking to reinforce.

Ian Mearns: The north-east is fortunate that, over the past couple of decades, Nissan has planted itself in the region and grown its business. Nissan exports a huge number of cars to the European Union from the dock at Jarrow. The problem, however, is that one of Nissan’s major shareholders is Renault. If we were to withdraw from the European Union, I am convinced that Renault would have no hesitation in withdrawing the Nissan investment from Washington and Jarrow and taking it back to France.

Catherine McKinnell: My hon. Friend makes a powerful point. I enjoyed his analogy of Nissan “planting” itself in Sunderland, growing from there and sprouting the manufacturing of the Leaf, a new generation electric vehicle being produced in Sunderland. The region is very proud of that and proud to be a net exporter and a huge contributor to UK plc.
The point that my hon. Friend makes about the destabilising effect of the current debate on Europe is important. Generally speaking, the Government’s mixed messages undermine the confidence to invest in this country and for the future. We know that businesses are sitting on stockpiles of cash because they are uncertain about the future, and the Government are failing to give them confidence in terms of economic stability going forward. There are also questions about whether we are going to be in the European Union and whether we are going to have trade deals with the US. Who are our friends here and who are our competitors? We have an uncertain environment for business at the moment.
Going back to the annual investment allowance, it might be helpful briefly to consider the background, which will set the scene for our amendment. The allowance was announced as part of the 2007 Budget by the former Chancellor of the Exchequer, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown). It was introduced as part of a package of reforms to enhance Britain’s international competitiveness, encourage investment and promote innovation and growth.
The allowance replaced first-year capital allowances and was introduced initially at a level of £50,000. It was made available to businesses regardless of size and regardless of their legal form. It meant that, in any given year, 100% of expenditure spent on general plant and machinery, other than cars, up to the £50,000 limit could be offset against taxable profits. The measure took effect in April 2008 and was very much aimed at targeting support on all businesses to invest for growth.
As referenced in the Opposition’s amendment 10 today, the previous Labour Government announced their intention to double the investment allowance at the March 2010 Budget as part of a series of measures intended to:
“support startups and small and medium-sized enterprises (SMEs), position the UK as a leading centre for research and innovation, and ensure that the UK is equipped with skills for growth and the infrastructure it needs to be successful in a low-carbon economy.”

Nigel Mills: I am surprised the hon. Lady quoted that speech on the Budget, because that must go down as one of the longest statements of hubris that we will ever find if we go back and read the economic forecasts. In that year’s Budget speech, the then Chancellor set out that he was making other changes to the capital allowances regime, including reducing the rate from 25% to 20% and taking away tax relief on investment in industrial buildings. Does the hon. Lady now regret those changes?

Catherine McKinnell: Following the 2010 Budget, we had a general election that brought in the Conservative-Liberal coalition, which has led us into stagnant growth and paltry growth rates since that time, so I am surprised that the hon. Gentleman seeks to reflect on what has been a very sorry period of poor economic growth, with confidence to invest at an all-time low.
The March 2010 Red Book went on to state:
“In order to provide further cashflow support and an incentive to increase business investment, the Government will increase the threshold of the AIA to £100,000 for expenditure incurred from April 2010.”
Interestingly, given our deliberations on clauses 203 to 212 of the Bill’s general anti-abuse rule, which were considered on the Floor of the House at Committee stage, the Red Book also stated:
“The Government will introduce a targeted anti-avoidance rule from 24 March 2010 to ensure this measure is focused on support for genuine business investment.”
Will the Minister outline what similar measures the Government will be taking, or whether the targeted approached adopted by the previous Labour Government will continue to apply to the temporary annual investment allowance? I would be grateful if the Minister commented on that.
From April 2008, under Labour, businesses were able to offset 100% of expenditure in any given year on general plant and machinery, up to a limit of £50,000, against taxable profits. From April 2010, that was increased to £100,000. We know the story from there. The coalition came to power, and we had the Chancellor’s so-called emergency Budget in June 2010, which announced to great fanfare that the annual investment allowance would be reduced to £25,000 from April 2012.
As my hon. Friend the Member for Nottingham East commented, the Chancellor sought to reassure us that the impact of the reduction from £100,000 to £25,000 would in fact be very limited because, in his words,
“Over 95 per cent of businesses will continue to have all of their qualifying plant and machinery expenditure fully covered by this relief.”
In other words, the Chancellor believed in June 2010 that only 5% of firms were receiving any benefit from the annual investment allowance. Indeed, HMRC’s tax information and impact note stated:
“Over 95 per cent of businesses are expected to be unaffected as any qualifying capital expenditure will be fully covered by the new level of AIA (£25,000).”
But it went on to clarify that
“between 100,000 and 200,000 businesses will have annual capital expenditure of over £25,000”,
and they would therefore be affected by the decision. In the Chancellor’s terms it is only 5% of businesses, but in anyone else’s terms it is a significant number of firms, which no doubt directly employ, or potentially employ, a significant number of people while indirectly supporting the employment of many others through their supply chains.
It is useful to remind ourselves of some of the views expressed at the time about the decision that the Chancellor took. The Institute for Fiscal studies commented that the losers from the cut
“would be those firms with capital intensive operations—with long lasting equipment and machinery—that currently benefit most from the capital allowances. While this is likely to apply more to firms in the manufacturing and transport sectors it may also be true to for some capital intensive service sectors firms.”
A senior economist at the manufacturers association the Engineering Employers Federation stated:
“Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies. It might be a positive signal for large companies, but not for their suppliers.”
In his evidence to the Treasury Committee on the June 2010 Budget, John Whiting, then tax policy director at the Chartered Institute of Taxation, and now director of the Office of Tax Simplification, expressed his concern that the cut would particularly hit medium-sized firms.
So we had the June 2010 Budget, which cut the annual investment allowance to £25,000 from April 2012. We then had two autumn statements and two Budgets before, lo and behold, the Chancellor announced in the autumn statement 2012 that he would increase the annual investment allowance—the one he had cut to £25,000—to £250,000 from January 2013.
It might be helpful if the Minister explained what changed between the June 2010 Budget and the 2012 autumn statement. I think some of us know the answer, but it would be helpful if he could provide some clarity on that point. What happened to business investment in the intervening period that drove the Chancellor from a position where he felt able to slash the annual investment allowance in 2010, because more than 95% of businesses were expected to unaffected, to announcing in 2012 that he was increasing it to £250,000?
Let us recall what the Chancellor said about the decision in the 2012 autumn statement. He said he was increasing the annual investment allowance because:
“It is a huge boost to all those who run a business and who aspire to grow, expand and create jobs.”—[Official Report, 5 December 2012; Vol. 554, c. 881.]
That surely means, does it not, that his decision to slash the annual investment allowance just two and a half years earlier was therefore the opposite: a huge blow to all those who run a business, who aspire to grow, expand and create jobs.
The Chancellor and the Minister cannot have it both ways. Either the annual investment allowance supports growth and business expansion or it does not. It would seem that the coalition has now come round to our point of view on the issue, believing that it is important to back businesses that want to grow, innovate and boost employment.
I should be grateful if the Minister clarified the number and size of businesses that are expected to benefit from the increase to £250,000, particularly given the clear statement that the intention is particularly to incentivise small and medium-sized enterprises and bring forward their capital expenditure.
The estimate in the HMRC tax information and impact note is that about 90,000 businesses that spend more than £25,000 a year on qualifying plant and machinery will benefit from the change. For comparison, I remind hon. Members that between 100,000 and 200,000 businesses were estimated to have capital expenditure of more than £25,000 in 2010.
Either the Chancellor got his figures wrong when he made the decision to slash the annual investment allowance, or there has been a disturbing drop—of between 10,000 and 110,000—in the number of companies investing more than £25,000 since 2010. We need to ask whether that is down to the Chancellor’s decision to slash the annual investment allowance, or whether it is a result of his and the Government’s catastrophically failing economic plan—or, whether, indeed, it is a combination of both.
When he announced the increase in 2012, the Chancellor stated that the
“capital allowance will cover the total annual investment undertaken by 99% of all the business in Britain.”—[Official Report, 5 December 2012; Vol. 554, c. 881.]
Does that in effect mean that the change will benefit about 4% of businesses in the country, or did he get his figures wrong there, too?
We need a great deal more clarity about the impact of the measure, in relation to the number and size of the firms—particularly small and medium-sized enterprises—that will or will not benefit. That is why the amendment would require a review of the impact of the various changes in the annual investment allowance since the coalition came to power.
Of course, those changes have been erratic, to say the least. Cutting the allowance from £100,000 to £25,000 and then increasing it to £250,000 does not exactly inspire confidence in the Government’s long-term approach and strategy for supporting businesses with growth and investment.
Andrew Gotch of the Chartered Institute of Taxation commented on the increase announced in the 2012 autumn statement:
“This is a very generous increase that will be warmly welcomed by many small businesses...However, we note that it is only a temporary increase. Business would really welcome some stability in this area. In recent years the allowance has fallen from £100,000 to £25,000. Now it will rise to £250,000 before, apparently, coming back to £25,000. Businesses like certainty above everything and the chopping and changing of the AIA has been a problem.”
The Institute of Chartered Accountants in England and Wales, although it supports the increase in the annual investment allowance, has said:
“We are less enthusiastic about the frequency of the change to this amount and consider the different calendar dates now being used are an unnecessary complication.”
I am sure that we would all agree that at the present critical juncture in our stagnating economy what businesses most need are long-term stability and certainty. That would give them the confidence to invest and make plans for the future. If they are to dig us out of this economic mess—of the Chancellor’s own making—and to create the new jobs that we desperately need as unemployment rises again, with youth and long-term unemployment at disturbingly high levels, it is vital that they help power our flatlining economy back into growth. We need to give confidence to business to invest.
What assessment has the Minister made of the impact of the constant chopping and changing on business confidence? Does he accept that it is vital for the Government to think strategically about how they support business in this country? Given the completely unpredictable nature now of the annual investment allowance, could he state on the record today whether the two-year temporary increase will remain in place until January 2015 as announced in the 2012 autumn statement? That would at least, if nothing else, give a short-term level of certainty to the businesses looking to take advantage of it.
We need confirmation that the Minister and the Government—particularly the Treasury—take seriously the impact of their policy decisions on business confidence. That is why our amendment proposes a review of the impact of the various changes to the annual investment allowance on business confidence since the coalition came to power. That would help persuade us, the business community and the general public that the matter is being taken seriously. I suggest that Government Members should have no qualms supporting the amendment, given that that should be our main focus at this time.
Finally, I want to comment on the complexity of the changes introduced by clause 2 and schedule 1. The Association of Taxation Technicians warned earlier this year that
“chopping and changing of capital allowances will lead to error, confusion and higher professional costs for small businesses”.
The ATT neatly summarised the potential problems caused by this temporary increase, in particular the fact that it runs from January 2013 to January 2015, rather than over companies’ usual accounting period.
“Under the Government’s proposals the annual investment allowance limit is being increased for the two-year period between 1 January 2013 and 31 December 2014 from £25,000 to a headline figure of £250,000.
“However, in reality, the actual limit on qualifying expenditure from 1 January 2013 can be less than £25,000 depending on the firm’s accounting year end and the level of its qualifying expenditure incurred before 1 January 2013.
“As the annual investment allowance limit was only reduced from £100,000 to £25,000 from 1 April 2012, the combined effect of that reduction and the proposed temporary increase is that within a period of just 39 months, there can be as many as seven occasions when the precise dating of expenditure determines how much tax relief the business will get each year on its capital expenditure.”
I apologise, Mr Amess, if that complicated analysis is giving a headache to hon. Members. I have no doubt that it will give a headache to many businesses and their accountants seeking to use the annual investment allowance.
Commenting further on the problem, the ATT’s president, Yvette Nunn, explained:
“These proposals are well intentioned but will be very problematic for small firms in particular. The arithmetical complexities involved will lead to error and confusion and result in increased professional costs for businesses and an unnecessary diversion of HMRC resources into policing the cliff edges at the critical dates.
“The majority of SME businesses spend far less than £250,000 every year. For them, it would be far simpler for the old £100,000 annual limit to run through to 31 December 2014. In that way, there would be only one cliff edge. So we are urging the Government to allow businesses to elect out of the confusing varying limits and into a flat limit of £100,000 a year from April 2012 for the whole affected period. We think that this would work well for businesses, HMRC and the economy.
“Small firms and entrepreneurs are the life blood of the economy. Encouraging these businesses is vital for Great Britain. If it looks too complicated to start and manage a business then we will deter the innovation and enterprise we need to get our economy motoring again.”
Any Members who have spoken to small and smaller-sized medium businesses in their constituencies will know that if things look too complicated, businesses will not take advantage of the available allowances. That is why we have tabled our amendment—so that the Government take seriously our concerns about not just the chopping and changing, but the complexity on the ground for small and medium-sized businesses up and down the country.
We have only to look at the explanatory note to clause 7 and schedule 1, which runs to 10 pages and which I am I sure all Members have studied, to comprehend how complex the changes will be for many businesses. Indeed, the Chartered of Institute of Taxation commented:
“The extreme complexity of the transitional rules may, for many businesses, negate the intended cash flow benefits of the increased AIA and could trip up some businesses, who might understandably assume that allowances are time apportioned.”
I would greatly appreciate hearing the Minister’s response to the concerns so well articulated by the ATT and the Chartered of Institute of Taxation when he addresses our concerns about the clause. I would be grateful if he outlined what steps, if any, the Government have taken to mitigate the confusion caused by the change and how it has been introduced. Indeed, how confident is he that the change enacted by clause 7 will result in the Government’s intended consequences?

Steven Baker: When I look at clause 7, schedule 1 and the explanatory notes, I am extremely grateful to the Government, because they make me feel 12 years younger. You may ask why such a lengthy piece of rule making would make me feel 12 years younger—it is because 12 years ago I was leading a team of people encoding HMRC tax rules so that submissions could be checked electronically as they came into the Revenue. One of the things we found was that in at least one case regarding expenses and benefits it was not possible to submit a valid tax return. The rules were incompatible with one another, so when I look at these rules, I worry that by the time everything has been encoded and checked, we may find that it is vastly too complicated.
Could the Government have done more to raise the allowance to this level while making it all much simpler? I realise that they inherited a hugely lengthy tax code that ballooned under the previous Government, but it is time for tax simplification, much as my former colleagues would curse me for saying so because it would take away some of their work. This is a great time—[Interruption.] I think that flat taxes are perhaps for another day, although I am grateful to hon. Friends for their suggestion. However, I wish that the Government would take a good look at the issue and see whether it is possible to do something simpler, although I appreciate that that may be something for the next Bill.

Chris Evans: It is a pleasure to serve under your chairmanship, Mr Amess. We are both supporters of the Caravan Club, my mother and father are both supporters, and we look forward to the day when 1 Parliament street becomes a Caravan Club site. I support you in that campaign, sir.
I refer to amendment 10. I do believe that one of the great innovations has been the annual investment allowance created by the Labour Government. For all the trashing of the reputation of my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), it was a very good innovation. It encouraged people to invest in plant and machinery, create jobs and bring about the type of growth that we were looking for.
The allowance was originally set at £50,000. It was a capital allowance that offered tax relief at 100% of the qualifying expenditure in the year of purchase, excluding cars. When the Chancellor presented his first Budget in 2010, he reduced it to £25,000, saying that most people’s expenditure was under £25,000 anyway. Now we have come back here again and he has put it up to £250,000. Those of us who were sometimes fortunate to work in the banking industry—it was sometimes unfortunate, depending on how people thought of us—know that unless someone has worked in business banking and put a bank loan together, they do not know how difficult that is. That is a problem in society generally. There are all sorts of factors, and people can attack banks all they want, but at the end of the day banks need to make profit. They do not want to risk that profit by lending to a company they are not sure about.
There are two problems with increasing the annual allowance. The first is that businesses do not work in a vacuum, or over planning periods of a year or 18 months. They often work on planning periods of five or 10 years. This temporary increase is only for two years. What does that say to businesses who want to invest in plant and machinery or expand, as we all want them to do? What do they do with their planning and where do they go next? Those questions need to be answered. They work on a five-year cycle, so they would say, “In two years, we can claim this tax relief, but what happens three years beyond that?” Both we and business need that certainty before we go on with the increase.
The second problem is that we have two dates. My hon. Friend the Member for Newcastle upon Tyne North quoted Andrew Gotch of the Chartered Institute of Taxation, who said:
“we note that it is only a temporary increase. Business would really welcome some stability in this area. In recent years the allowance has fallen from £100,000 to £25,000. Now it will rise to £250,000 before, apparently, coming back to £25,000. Businesses like certainty above everything and the chopping and changing of the AIA has been a problem.”
What can we do? When I spoke previously in the Finance Bill Committee, I said that we could do nothing to change it; the Bill was going through, whether we liked it or not. The law does not allow us to make any amendments, but we can bring about a review. If we do that, we can answer our questions about business stability and moving forward.
I will not take up too much of the Committee’s time, because I can see that we are heading towards lunch, but I will pick up on the point made by the hon. Member for Wycombe, which is in the south somewhere; I am sure I have seen it on a map. The problem is that the explanatory notes are dry and complicated. My worry is that if we asked most business people whether they had a wish list, they would say that they wanted one thing—lower taxation. Okay, we are lowering corporation tax—I say that quietly, because I do not want to praise the Government to much—but the other thing that business people want is simplicity. They do not want red tape; they want to cut through it, but the explanatory notes are extremely complicated. I previously worked in business banking, and I have read them four or five times and cannot make head nor tail of them.
We need stability, and that is why the Government should not just see the amendment as a Labour amendment and vote it down. I hope that they will look at bringing about a review, because there is so much complexity and instability. There have been so many changes, and we need to think about the message we are sending out. The Chancellor is chopping and changing so much, and we need to understand the rationale. Why, if he said in 2010 that the majority of businesses were investing less than £25,000, does he want to increase it to £250,000? We need those answers, and they will not come through Budgets, comprehensive spending reviews or finance Bills; they will only come through a review of the specific policy. I hope that the Minister will look favourably on setting up such a review so that we can know that rationale.

Sajid Javid: We have heard from a number of hon. Members, so I will get straight down to it. Clause 7 and schedule 1 increase the annual investment allowance from £25,000 to £250,000 for two years from 1 January 2013. The clause is designed to stimulate growth in the economy by providing an additional time-limited incentive for businesses to invest in plant and machinery. It has been warmly welcomed by business representative groups such as the CBI, the EEF, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses.
The changes made under clause 7 and schedule 1 enable companies and unincorporated businesses, regardless of their size, to reduce their taxable profits effectively by 100% of their expenditure on qualifying plant and machinery, up to £250,000 in each of the years 2013 and 2014. That effectively accelerates the tax relief on expenditure between the current threshold of £25,000 and the new maximum limit of £250,000. The clause will increase the net present value of capital allowances to investors in plant and machinery, and will provide a valuable cash flow benefit likely to be of most help to small and medium-sized businesses.
It is estimated that the new £250,000 annual investment allowance limit will cover the qualifying annual investment by 99% of businesses in the United Kingdom. Increasing the threshold of the allowance to £250,000 will directly benefit about 90,000 businesses that currently invest more than £25,000 a year on plant and machinery.

Catherine McKinnell: The Minister has again referred to the number of businesses that are likely to benefit from the increased annual investment allowance. What happened to the 100,000 to 200,000 businesses that were set to lose from the reduction that was announced in 2010?

Sajid Javid: Those businesses will all benefit from the increase, which is a lot more generous than the allowance that was in place in 2010 when the Government took office.
Raising the threshold will also encourage businesses that currently invest below £25,000 to increase their level of investment so as to benefit from the additional relief. Supporting businesses in that way will encourage them to take advantage of new technologies and new opportunities. The move has been backed by business bodies, several of which I mentioned earlier.
Amendment 10 would require the Treasury within six months of Royal Assent to review the impact on small and medium-sized enterprises and on business confidence of the changes to be effected by the clause and of the change to the annual investment allowance threshold made in the Finance Act 2011, and to place a copy of the review in the House of Commons Library.
The Government are fully committed to providing greater transparency on the impact of their tax measures. I am sure that Opposition Members will have already examined the tax information and impact notes that we published on 6 December relating to the clause. They included the Office for Budget Responsibility’s certified costing and the initial assessment expected economic impact of the measure. It recorded that accelerating relief on qualifying expenditure between £25,000 and £250,000 will provide an incentive, particularly to small and medium-sized businesses to increase and bring forward their investment in plant and machinery.
The published note also records that the measure will be duly monitored in the normal way through information collected from businesses and their tax returns. Clearly, full and systematic information from tax returns will not be available for some time, and certainly not within the six months of Royal Assent, which is the time scale envisaged by the review proposed in the amendment. Therefore, the amendment is not necessary. The Government keep all tax policy under review, with HMRC and HMT routinely monitoring the impact of such economic reforms on a case-by-case basis.

Catherine McKinnell: Given that the Minister believes that the review is not necessary, what assessment have the Government made of the change between 2010 and today that made it a good policy decision to slash the annual investment allowance to £25,000? What has changed since then and now, when it is about to be increased to £250,000? Presumably, the Government have carried out a full assessment, given that they do not believe that a review of this change is necessary.

Sajid Javid: I was just coming to that. We recognise that the change follows quite soon after the decrease in the annual investment allowance to £25,000 that was announced in the June 2010 Budget and implemented in the Finance Act 2011, which took effect from April 2012. The Government’s central position has not changed and remains that, in general, a lower corporation tax rate with fewer reliefs and fewer allowances will provide the best incentives for business investment, with the fewest possible distortions. That is why we have announced a further reduction in the main rate of corporation tax, as we discussed earlier, from April 2015 and is also why the current 10-fold increase in the maximum annual investment allowance is time limited rather than permanent. We feel strongly and recognise, however, that the particular challenges that businesses face in the current economic climate make positive action by the Government to support and encourage increased investment in the short term both appropriate and highly desirable, which is why we are introducing the temporary measure.
Before I conclude, I want to turn to a couple of other points. The hon. Member for Newcastle upon Tyne North was right to mention the impact that the accounting period will have on the tax returns of businesses, particularly SMEs. We considered that, but we wanted the incentive to take effect as soon as possible, which is why it started on 1 January 2013 rather than waiting for the start of the new tax year. When we considered the impact, we first took into account the fact that many businesses use the calendar year for their accounting period, which makes the proposal quite straightforward for them. Obviously, those companies that do not use the calendar year will have to use a time-apportioned system, which is more difficult to calculate, but the benefits outweigh the extra burden, so it is a valid trade-off. It was the right course of action for the Government to take to ensure that the measure took effect as soon as possible.
My hon. Friend the Member for Wycombe and the hon. Member for Islwyn raised several similar points, focusing on the general complexity of the tax code as well as this particular measure. My hon. Friend the Member for Wycombe asked whether it was possible to simplify the scheme, and we looked at all the options and made it as simple as possible. It is in the Government’s interest to make tax incentives as simple as possible, so that as many companies as possible can take them up and increase investment. The hon. Member for Islwyn was right to mention the overall complexity of the tax code, which he will know from working with companies during his time in banking, but he will also know that the fastest expansion of our country’s tax code took place during the 13 years of the previous Government. At 11,000 pages, it is one of the longest in the world—longer than India’s—and it tripled in size under the previous Government. Therefore, if he truly is concerned, I urge him to ask his hon. Friends why they did that and why they damaged so many businesses.
In conclusion, we recognise the challenges that businesses face in this current economic environment, and the temporary increase in the annual investment allowance will help them to meet those challenges by supporting investment and growth. I therefore ask the hon. Lady to withdraw the amendment.

Catherine McKinnell: The Opposition feel that proper analysis of the issue is still necessary so that the Government have a better understanding of the long-term approach to supporting business investment. We need better to understand exactly which firms will benefit from the provisions of clause 7. That is what our amendment calls for, so we urge the Committee to support it.

Question put, That the amendment be made.

The Committee divided: Ayes 12, Noes 15.

Question accordingly negatived.

Clause 7 ordered to stand part of the Bill.

Schedule 1 agreed to.

Ordered, That further consideration be now adjourned. —(Greg Hands.)

Adjourned till this day at Two o’clock.